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Chapter 3
Porter Competitive Model

for
Industry Structure Analysis
Introduction

Value Chain
Can Information Technology:
Build barriers to prevent a company from entering an
industry.
Build in cost; difficult for a customer to switch suppliers.
Change the basis for competition within the industry.
Change the balance of power in the relationship that a
company has with customers or suppliers.
Provide the basis for new product and services, new
markets or other new business opportunities.
Intra-Industry
Rivalry
Strategic Business Unit
Bargaining
Power
of Buyers

Bargaining
Power
of Suppliers

Substitute
Products
and Services

Potential
New Entrants

Source: Michael E. Porter
Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
Generic Value Chain
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
PRIMARY ACTIVITIES
PROCUREMENT
TECHNOLOGY DEVELOPMENT
HUMAN RESOURCE MANAGEMENT
FIRM INFRASTRUCTURE
S
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Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright
1985 by Michael E. Porter.
Key Objective
Gain a competitive advantage!

Understand the forces that influence this.

Know how to use models to do an objective
evaluation.
Chapter 3
The Porter Competitive Model
for
A Successful IS Professional
Understands both IT and the business in which
they work.
Has good communication skills.
Can sell their IT solution to someone elses
problem.
Is a self starter and can handle a large amount
of personal responsibility.
Manages their own career.
Has a high degree of personal confidence.
ATP Approach
1. Read Value Line articles for industry perspective and
company information.
2. Log onto the company web page and look at general
business information and most recent annual report.
A. Determine dominant business.
B. Identify business and IT leaders.
C. Define the industry the company is in.
D. Identify the major markets in which they
operate and determine the market that you will
analyze using the Porter Competition model.
E. Start to develop an understanding of the six
primary business strategies in this industry.
ATP Research
1. Value Line
2. Company web page and annual report.
3. Internet search engines:
Yahoo
Ask Jeeves
Google
4. Library reference documents
5. Jack Callon and his documents

How and Where to Search
Company Name and Executive Names
Competitor Name/Web Pages
IT Publications - Datamation, InformationWeek
Business Publications - ABI, Fortune, BusinessWeek
Industry Associations - e.g. Semiconductor Industry Association
Financial Analysis Web pages
Library Reference Desk - Barons, Moodys, etc.
Jack Callons office

Awareness of competitive forces can
help a company stake out a position
in its industry that is less vulnerable
to attack.

Michael E. Porter
Competitive Strategy

The Plan
Address the Concepts of the Porter
Competitive Model.
Provide some industry examples using the
Competitive Model.
Address the Value Chain conceptually and
with industry examples.
Revisit each of these using the Airline
Industry as the example in Chapter 4.
Was not developed for IS use.
Breaks an industry into logical parts,
analyzes them and puts them back together.
Avoids viewing the industry too narrowly.
Provides an understanding of the structure
of an industrys business environment.
Provides an understanding of competitive
threats into an industry.

Two Key Questions
1. How structurally attractive is
the industry?

2. What is the companys relative
position within the industry?
Why Do You Care?
The collective strength of the industry forces
determines the ultimate profit potential of an
industry.
The strongest competitive forces are of greatest
importance in formulating competitive strategies.
Every industry has an underlying structure, or a
set of fundamental economic and technical
characteristics that gives rise to these competitive
forces.
Why Do You Care?
This view of competition pertains to industries
selling products and those dealing in services.
A few characteristics are often key to the strength
of each competitive force.
Key Industry Analysis Factors
Collecting the data.
Determining which data is crucial.
Selecting an appropriate overall approach.
Deciding on the logical starting point.

Basic Objectives of the SBU
1. To create effective links with
buyers and suppliers.

2. To build barriers to new entrants
and substitute products.
Intra-Industry
Rivalry
Bargaining
Power
of Buyers

Bargaining
Power
of Suppliers

Substitute
Products
and Services

Potential
New Entrants

Figure 3-1
Rivalry Likelihood
Profit margins.
Industry growth rate and potential.
A lack of capacity to satisfy the market.
Fixed costs.
Competitor concentration and balance.
Diversity of competitors.
Existing brand identity.
Switching costs.
Exit barriers.
A Buyer Has Power If:
1. It has large, concentrated buying power that enables
it to gain volume discounts and/or special
terms or services.
2. What it is buying is standard or undifferentiated and
there are multiple alternative sources.
3. It earns low profit margins so it has great incentive
to lower its purchasing costs.
4. It has a strong potential to backward integrate.
5. The product is unimportant to the quality of the
buyers products or services.

A Supplier Has Power If:

1. There is domination of supply by a few companies.
2. Its product is unique or at least differentiated.
3. It has built up switching costs.
4. It provides benefits through geographic proximity to
its customers.
5. It poses a definite threat to forward integrate into
its customers business.
6. A long time working relationship provides unique
capabilities.
Definitions
New Entrant: An existing company or a startup
that has not previously competed with the SBU
in its geographic market. It can also be an
existing company that through a shift in business
strategy begins to compete with the SBU.
Substitute Product or Service: An alternative
to doing business with the SBU. This depends
on the willingness of the buyers to substitute, the
relative price/performance of the substitute
and/or the level of the switching cost.
Possible Barriers to Entry
Economies of scale.
Strong, established cost advantages.
Strong, established brands.
Proprietary product differences.
Major switching costs.
Limited or restrained access to distribution.
Large capital expenditure requirements.
Government policy.
Definite strong competitor retaliation.
Substitute Threats
Buyer propensity to substitute.
Relative price/performance of substitutes.
Switching costs.

Competitive Strategy
What is driving competition in my current or
future industry?

What are my current or future competitors
likely to do and how will we respond?

How can we best posture ourselves to achieve
and sustain a competitive advantage?

Strategy Options
According to Michael Porter
Primary Strategies
1. Differentiation
2. Least Cost
Supporting Strategies
1. Innovation
2. Growth
3. Alliance
Can Information Systems:
1. Build barriers to prevent a company from entering
an industry?
2. Build in costs that would make it difficult for a
customer to switch to another supplier?
3. Change the basis for competition within the
industry?
4. Change the balance of power in the relationship
that a company has with customers or suppliers?
5. Provide the basis for new products and services,
new markets or other new business opportunities?

Heavyweight Motorcycle Manufacturing Industry
North American Market

Bargaining
Power of
Buyers
Recreational Cyclist
Young Adults
Law Enforcement
Military Use
Racers

Potential
New Entrant
Substitute
Product or
Service
Intra-Industry Rivalry
SBU: Harley-Davidson
Rivals: Honda, BMW,
Suzuki, Yamaha
Foreign Manufacturer
Established Company
Entering a New Market
Segment
New Startup
Parts Manufacturers
Electronic Components
Specialty Metal Suppliers
Machine Tool Vendors
Labor Unions
IT Vendors
Bargaining
Power of
Suppliers
Automobiles
Public Transportation
Mopeds
Bicycles

Engineering Product Design Manufacturing Sales/Distribution Business
Information Systems
Company Structure
Independent Alliances Joint Ventures/Subsidiaries
Sales/Distribution Strategy
Distributors Independent Dealers Franchised Dealers
Manufacturing Strategy
Vertically Integrated Vendor Emphasis Outsource
Market Strategy
North American Europe Japan/Asia Latin America
Law Enforcement Military Recreational Professional Young Adult
Product Strategy
Type/Purpose/Size
Heavyweight Off-Road Dual Purpose Road Racing Caf Racer
Price Strategy
Entry Level Moderate Premium
Business Strategy Model - Motorcycle Manufacturing Industry
Porter Competitive Model Analysis
for the San Francisco Giants
Intra-Industry
Rivalry
SBU: SF Giants

Buyers

Suppliers

Substitute Products and Services

New Entrants

Porter Competitive Model Analysis for the San Francisco Giants
Bay Area Market
SBU: SF Giants
Rivals: Oakland As
Minor League Baseball
S.F. 49ers
Golden State Warriors
College Athletic Events
High School Athletic Events
Movies, Stage Plays, etc.
General Travel and Travel Packages
Buyers
Die Hard Giants Fans
Die Hard Baseball Fans
Fair Weather Baseball Fans
Non-baseball Fans
Out of Town Visitors
Opposing Team Fans
Age Group Segments
Groups Versus Individuals
Corporate Sponsors
Sports Writers and Media
Outlets

Suppliers
Players Union
City of SF
Transportation Services
Food Service
Sovereigns
Police and Sanitation
Service
Utilities
Stadium Employees

Substitute Products and Services
Televised Baseball Games - Free or Cable Service at Home
Televised Games at Sports Bars
Radio Broadcasts of Baseball Games
Rotisserie Leagues, Trading Cards, Memorabilia
New Entrants
Arena Football League
Canadian Football
Professional Hockey
Professional Soccer
Sumo Tournaments
Bargaining
Power
of Suppliers
Potential
New Entrants
Substitute
Products
and Services
Bargaining
Power
of Buyers
SBU: Kleiner Perkins Caufield & Byers
Rivals: Hambrecht & Quist
Sequoia Capital
Sierra Ventures
Sequoia Capital
Arthur Rock & Co.
Asset Management Corp.

Venture Capital Industry in the U.S.
Breakdown of
industry boundaries
Increasing sophistication
More options
Better information
Low Barriers to Entry
Rapid Entry
Attractive Rates of Return
More global sources
Concentration in the
hands of a few institutions
Increasing sophistication
Better information
More firms
More capital
Diminishing opportunities
Cut-throat competition
Higher deal prices
VC Sponsored Companies
Digital Equipment
Apple Computer
Federal Express
Sun Microsystems
Compaq
Lotus Development
Staples
Major Start-up Company Sources
Stanford University
MIT
University of Texas
Venture Capital Industry
The roots of the industry can be traced to the 1920s and
1930s within the U.S.
Early companies that obtained VC funding were Eastern
Airlines and Xerox.
First VC firm was ARD in 1946 founded by Ralph
Flanders, President of Federal Reserve Bank of Boston.
Big push to take advantage of WWII technology developed
at MIT.
The industry all but shut down between 1970 and 1977.
Economic growth implications of emerging, small
companies.
VC Strategies in 1960-1970
Invest in management team and market potential.
Stress value-added company building.
Concentrate on start-up and early stage companies.
Be a lead investor.
Invest for ten years, maybe longer but harvest when
appropriate.
Raise a new fund once your present fund is performing
well.
Deal making and transaction skills are important but not
central to the value creation process.
1980 and Beyond Strategies
Raise new funds while the money is flowing instead of
when you need the money.
Rely on financial engineering for quick entry and exits.
Exploit hot IPO markets to harvest early and often.
Co-invest versus being the lead investor.
Look to later-stage LBO and MBO deals for large
minimums and faster returns.
Worry less about the management team (You can shape it
later).
Worry more about the fiduciary expectations of the limited
partners.
Trade the horse before it dies.
Education Industry: U.S. Universities
Bargaining
Power of Buyers

Bargaining
Power
of Suppliers

Substitute
Products
and Services

Potential
New Entrants

Faculty
Staff
Equipment and
Service Suppliers
Alumni
Foundations
Business
Government
Books and Videotapes
Computer-Based Training
Training Companies
Consulting Firms

Students
Parents
Business
Employers
Legislators
Foreign Universities
Distance Learning
Motorola U.
National Technical University
U.S. University Industry Structure
Intra-Industry Rivalry:
Low growth rate or
shrinkage
Excess capacity
Undifferentiated product
Competition for funding
and contributions
Bargaining Power of Buyers:
Price Pressures
Mobility

Bargaining Power of Suppliers:
Cost Pressures
Bid Processes Are Common
Unions and Tenure
Barriers to Entry:
Low entry barriers
High exit barriers
Substitutes:
Easy to substitute
Self-study success
Porter Competitive Model Tips

1. To incorrectly define the industry can cause major
problems in doing Section I of the analysis term paper.
2. You must identify the specific market being evaluated.
3. Your analysis company is the Strategic Business Unit.
4. Identify rivals by name for majors, by category for minor
rivals if needed to present the best possible profile of
rivals.
5. Be sure to address the power implications of both
customers and suppliers. Power buys them what?
6. Identify buyers and suppliers by categories versus
companies.
7. Summarize your Porter Model analysis.

Computer Industry
Why is this industry more of a challenge to
evaluate using the Porter Competitive
Model?
Old Computer Industry
Layer 5
Distribution

Layer 4
Application
Software

Layer 3
Operating
System
Software

Layer 2
Computing
Platforms

Layer 1
Basic
Circuitry

IBM DEC HP Fujitsu NCR
Figure 3-3
The New Computer Industry
Layer 1
Microprocessor
Intel X86 Motorola RISC Power PC
Layer 2
Computer
Platforms
IBM Compaq Other Intel-Based PCs Apple Macs Other
Layer 3
Operating
System
Software
MS DOS Windows OS/2 Unix Apple
Novell Netware Banyan IBM Others
Layer 4
Applications
Spreadsheets
Word Processors
Database

Lotus 1-2-3 Microsoft Excel Quattro Pro
Layer 5
Distributors
Computer
Dealers
Super
Stores
Mass
Merchandisers
Clubs
Mail
Order
Value-add
Resellers
Direct
Sales
Force
Other
Figure 3-4
Computer Industry Market Segments
Supercomputers
Mainframes
Minicomputers
Workstations
Personal Computers
Peripheral Equipment
Hardware
Software
Services
Telecom Networks?
PC Industry Segment
1. Passed $100 billion in sales in the first ten years.
2. Growth and competition was based on industry standards
like never before.
3. This has spawned thousands of niche companies.
4. The PC has fundamentally restructured the Computer
Industry.
5. Industry pioneers believe the revolution is no more than
half over.
Change Relative to Selling PCs
1. Languages
2. Application Packages
3. Connectivity and Compatibility
4. Multimedia
5. Groupware
Computer Industry
Of the top fifteen companies in 1975, only
four remain:
IBM
NEC
HP
NCR
The Old Computer Industry
IBM and the BUNCH
Burroughs
Univac
NCR
Control Data
Honeywell
PC Industry Change
Atari
Cromemco
Fortune Systems
Wicat Systems
Kaypro
Morrow Designs
Osborne Computer
Victor Technologies
Compaq
Dell
Gateway
IBM
HP
NEC
The Future Computer Industry
1. Traditional US Companies (large).
2. Asian Electronic Companies.
3. The New Strategy Companies.
Why has the US continued to be the world leader in
the computer industry?
Porter Value Chain
Basic Concept:

1. Deals with core business processes.

2. Enables tracking a new idea to create a new
product and/or service from origination all the
way to customer satisfaction.
Porter Value Chain
Service
Sales
and
Distribution
Marketing
Production
and
Manufacturing
Engineering
Manufacturing Industry Value Chain
Research
and
Development
Retail Industry Value Chain

Marketing
and
Selling
Operating
Stores
Distributing
Inventory
Managing
Inventory
Buying
Partnering
with
Vendor
Value Chain Things to Remember
1. Value to customer objective is not clear.
2. Relay team concept is too time consuming and doesnt
work in the current competitive environment.
3. Maximize the value-add activities and eliminate as
much as possible the things that do not add value.
4. Make sure that each step in the overall process (each
function) does things consistent with the overall
objective of value to customer.
Generic Value Chain
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
PRIMARY ACTIVITIES
PROCUREMENT
TECHNOLOGY DEVELOPMENT
HUMAN RESOURCE MANAGEMENT
FIRM INFRASTRUCTURE
S
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Figure 3-6
1985 by Michael E. Porter.
Property and Casualty Industry Value Chain
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
PROCUREMENT
TECHNOLOGY
DEVELOPMENT
HUMAN
RESOURCE
MANAGEMENT
FIRM
INFRASTRUCTURE
-Financial Policy -Regulatory Compliance - Legal - Accounting
Actuary
Training
Agent
Training
Claims
Training
Claims
Procedures
Claims Settlement
Loss Control
Policy Sales
Policy Renewal
Agent Manage-
ment
Advertising

Independent
Agent Network
Billing and
Collections
Underwriting
Investment
Policy Rating
Actuarial Methods
Investment
Practices
I/T
Communications
Product
Development
Market Research
Figure 3-7
Included with permission of Michael E. Porter based on ideas in Competitive Advantage: Creating and Sustaining
Superior Performance, copyright 1985 by Michael E. Porter.
Technologies in the Value Chain
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
PROCUREMENT
TECHNOLOGY
DEVELOPMENT
HUMAN
RESOURCE
MANAGEMENT
FIRM
INFRASTRUCTURE

Information System Technology
Planning and Budgeting Technology
Office Technology
Training Technology
Motivation Research
Information Technology
Product Technology
Computer-Aided Design
Pilot Plant Technology
Diagnostic and
Testing Technology
Communications
Technology
Information
Technology
Transportation
Technology
Material Handling
Technology
Storage and
Preservation
Technology
Communication
System
Technology
Testing Technology
Information
Technology
Information Systems Technology
Communication System Technology
Transportation System Technology
Software Development Tools
Information Systems Technology
Basic Process
Technology
Materials
Technology
Machine Tools
Technology
Materials Handling
Technology
Packaging
Technology
Testing Technology
I/nformation Tech.
Transportation
Technology
Material Handling
Technology
Packaging
Technology
Communications
Technology
Information
Technology
Multi-Media
Technology
Communication
Technology
Information
Technology
Figure 3-8
1985 by Michael E. Porter., p. 167.
Summary of Chapter 3
By Sandra Chu
The Porter Competitive Model
for
Chapter Objectives
1. To identify significant forces in addition to direct
competitors and customers that impact a companys
position within an industry.
2. To understand the importance of basic objectives that a
company has relative to the forces within the Competitive
Model.
3. To appreciate the power implications within the Porter
Competitive Model.
4. To understand the two basic strategies and three
supporting strategies used by intra-industry rivals.
5. To recognize industry characteristics that make the use of
the Porter Competitive Model most effective.
Intra-Industry
Rivalry
Bargaining
Power
of Buyers

Bargaining
Power
of Suppliers

Substitute
Products
and Services

Potential
New Entrants

Figure 3-1
Industry Structure and the Company Position
How significant is the structure of the
industry to existing companies and possible
new entrants or providers of substitute
products or services?

What is the companys relative position
within the industry?
Logical starting point.
Deals with the nature and degree of competition.

Strategic Business Unit has two primary objectives:
Create effective links with buyers and suppliers
Build barriers to new entrants and substitutes
SBU and Competitive Strategies
Primary Strategies:
Differentiation: be different, be unique at meeting
some need valued by the customer.
Low-Cost: be the cheapest.
Supporting Strategies:
Innovation: doing creative, often original things.
Growth: stressing the importance of business growth.
Alliances: competing through formalized relationships
with other business enterprises.

Threat of New Entrants
Two possible sources.
Consideration of barriers to entry.

Threat of Substitute Products or Services
Important to clearly understand the definition.
Focus on viable alternatives.
Determine attractiveness and deterrents of
substitutes.
The Value Chain
Systematic method for examining the business
processes of a firm and the interactions between
them.

Idea of a chain -- identify core business
processes and how they can be linked.
Value Chain
1. The ultimate objective is value to customer.
2. A focus needs to be on value-add activities and trying to
eliminate as many activities as possible that do not add
value to customer.
3. Make sure that specific business functions keep in mind the
ultimate objective and not become distracted by doing
things that seem to make them look good.
4. Remember that time has become a major competitive
consideration and that a relay team concept can contradict
this premise.
Conclusions
The Porter Competitive Model is key to
understanding business competitiveness.

It is important for a company to assess its position
within an industry and relative to customers and
suppliers.

The model can be used to understand if IT can
change the competitive environment of an
industry.

Possible Exam Questions
1. Identify an industry where information systems act as a
significant barrier to entry and explain the significance of this
barrier.
2. Identify and explain the two basic strategies and three
supporting strategies used by intra-industry rivals.
3. What is the primary benefit to be derived through the use of
the Porter Value Chain?
4. Explain the logic of growth as a competitive strategy and
provide two company examples where this was a key
strategy.

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Chapter 3

Porter Competitive Model

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